Haier Earnings: Product Upgrades and Cost Optimization Offset Top-Line Slowdown; Shares Attractive

We maintain our CNY 33/HKD 36.70 fair value estimate for narrow-moat Haier following mixed first-half results. While revenue grew only 3% year on year given domestic demand softness, operating profit outperformed with 20% growth amid product premiumization and supply chain digitalization. As a result, the company lifted gross margins for the domestic and overseas businesses and reduced the marketing cost ratio by 50 basis points to 13.8% versus a year ago. Management envisions continuing earnings improvement, given new government subsidies on home appliances in China and more cost control. We lowered our 2024 revenue forecast by 3% but raised our operating profit estimate by 17% to account for the better margins. Our midcycle forecasts are intact. Haier’s shares still have decent upside to our valuation; we think the market underappreciates the firm's sector leadership and potential for improving profitability.